Ben Horowitz: Career Tips, Westing and Options

Stanford course CS183B: How to start a startup . Started in 2012 under the leadership of Peter Thiel. In the fall of 2014, a new series of lectures by leading entrepreneurs and Y Combinator experts took place:



Ben Horowitz: Now we are going to analyze the post from Sam [ Altman ] blog. You can find some very good thoughts in it, but also there is something that I would like to discuss with you.
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Here is an excerpt from that very post: “Most employees have only 90 days after leaving work to exercise their options. Unfortunately, their costs include the option price and the amount of tax fees, - I will explain this a bit later, but for now I just want to read the text, - Often it requires more money than an employee has. ” This is the key point.

Employees very often have to choose between leaving their jobs and losing their options, that is, the money they own, as they can neither afford to exercise the option nor continue to work in the company when it does not bode well. Therefore, when he is fired, the employee is in a rather nasty situation. I will return to this issue, as it is really important.

Next, Sam writes:

“It seems unfair. The best solution here is what I heard from Adam D'Angelo, the extremely smart guy from Quora [ Adam is the CEO and co-founder of Quora ]. The idea is that the employee is given options that can be exercised within 10 years from the date of the grant, and this should be the case in most cases. There are some difficulties associated with this, but it is much better than losing your money. I believe that this policy should be followed by all start-up firms. ”

Is Sam right? Should all startups adhere to this policy? Let me explain again the essence of the issue. Today, in the overwhelming majority of cases, the procedure for obtaining a package of options in startups is as follows: you receive the company's shares and after a certain time are vested with property and financial rights to them. When you leave the company, you are given a period, the duration of which depends on corporate rules, usually 90 days.

If during this period you do not repurchase common shares in the amount of your share, then the option disappears and you no longer own! Depending on when exactly you got a job in the company, this can cause big problems. The cost of many companies today is very high, take for example Airbnb or Uber. When you get a job for them, you are told: "If you compare the value of a company’s shares under article 409A of tax legislation with the value of preferred shares for which we offer you an option, it turns out that it already costs $ 10 million." And here you think: “Wow, 10 million dollars! I'm rich!"

But what they probably won't tell you is: since preferred shares will be valued at $ 10 million, your option will probably cost you $ 2.5 million when you decide to leave the company [ 2.5 million is the value of ordinary shares, which the employee must redeem in this case in order to receive his 10 million (assuming that in startups, preferred shares usually cost between 20% and 80% more than ordinary shares, Ben assumes that there is a 75% difference in the value of shares in this situation ) ]. If you do not find this money within 90 days, then your 10 million will simply disappear, and you will lose everything. Therefore, Sam is surprised: “Wow! This sucks! ”That's how he wrote on his blog, explaining that the situation needs to be changed.

The first thing you should ask yourself: “This situation has been taking place since the 80s. Why do such rules have been in effect for 30 years now? ”And I don’t know whether Sam came to this conclusion on his own or just guessed it intuitively, but he was right. Something has really been changed. Until 2004, a law called APB Opinion Number 25 was in force. He regulated actions with options. And, by the way, because of him, many were imprisoned. I know people who have been convicted under law APB 25, so I am glad that he no longer acts. This is a very controversial law. Many did not understand its essence and because of this they really went to jail because of this.

At the time when this law was in effect, if you gave someone 10 years to exercise an option, you would never be able to become a public company, because the cost of exercising the option would depend on the stock price. The higher the stock price was, the greater was the amount of compensation payments. Worst of all, no one knew what it would be like after a while, so you could never predict the amount of compensation payments.

It turned out to be a function of the stock price, and the higher it was, the more money the employee lost. In those days, no one tracked the cost of the option, as it was meaningless. That is why everyone was given a period of 90 days, which was stipulated in the relevant law. This is where these 90 days come from. But the question arises: is it worth continuing to use this formula now? You catch what the essence? All clear? This problem is more complicated than the first two, but it is of great importance.

For you, it consists in deciding the following question: do you want to be fair to your employees? Nobody wants to tell a new employee: “Listen, you can get the rights to all these actions for 4 years ... Joke!” It is especially inconvenient to say something like someone you fire: “I am firing you! I'm really sorry to do this, but you know what? I'm still going to take all your money! ”

That's the problem. You need to think about the employees who remain in the company and reward them. Your reputation depends on the behavior of the employee who leaves the company, and this is very important. He thinks like this: “I worked in the company for a year. Where is my money? Ah, it turns out, I have only 90 days to exercise options? I know that this information was indicated in small print in my contract, but the manager who hired me never mentioned it. No one ever told me that I would need $ 2 million in order to receive my stake. And I have no such money. It turns out that if I were rich, would I get my shares? This is unfair. It turns out that I was first fired, and then "squeezed" money. You know what? I will tell everyone what problems you gave me. ” This is a serious threat to your reputation. You should take this moment into account when shaping company policy.

You also need to think about the employees who remain in the firm. Every time someone leaves, they will wonder: “So, here he is gone. Was it reasonable? ”Your employees know each other better than you do. This happens in any company, no matter what. And if the person they work closely with is leaving, the thought comes to their mind: “Maybe I should leave too? What do the employees who leave leave get and how does this compare to what is stipulated in my contract? ”

If you seriously analyze this situation, you can discern a lot of nuances. Companies in Silicon Valley erode shares at 6-8 or even 10 percent a year for employee options. Consider that in any case, when an employee leaves and cannot exercise his option, his share returns to the common pool, after which you can transfer it to people remaining in the company. So the company manages to avoid excessive erosion of shares. You should think about this. I'm not saying that you need to somehow influence this process, but it’s worth thinking about.

Secondly, the potential loss of all shares is a very big incentive for an employee to remain in the company. This can be either a plus or a minus. If you do not want to lose some employee who can leave, then this is in your favor. But this may be a big disadvantage for you, if the situation is just the opposite, but the employees are only reluctant to lose shares. Sometimes having an unsuitable employee is worse than not having an employee at all. On the other hand, giving employees 10 years to implement an option for stocks with high volatility is a good option. 10 years on the sale, volatility and long term - that is the value of the option.

10 years on the exercise of an option from a startup is a good option. It should be noted that employees who remain in the company do not receive it. Those who remain simply own the shares and do not receive a new job and another shareholding with it. This should be taken into account, as the situation is complex. Each company should review its attitude to it.

I would not go as far as Sam, arguing that the above policy should be applied in every firm. Should proceed from their own goals. I have two Alternative Theses regarding corporate culture. According to the first, you need to be as honest with your employees as possible. When a person is hired, we want to do everything in fairness, so he is guaranteed a period of 10 years to exercise the option. What we promise to provide, the employee receives, regardless of whether he is rich or poor. This is a resolved question.

No company uses the second way to solve this problem. And I really like Sam's post, precisely because he wrote the following in it:

“You can directly tell the new employee that he is guaranteed to receive a salary, but in order for his shares to have sufficient value, certain conditions must be met. First, we must wait for Westeing. Secondly, you should remain in the company until its release on the stock exchange. Then he will get this money. ”

Finally, the company must be positively evaluated, because 10% of zero is zero. The reason why it is worth adhering to this policy is that in fact we value those who stay with us. You seem to be saying: “You should not get settled in our company if you are going to leave to work in another after 18 months, because you will not be able to sit on two chairs. Our policy guarantees this. ”

Here are two ways to solve this problem. Which one to choose depends on you and on what kind of corporate culture you want to create. Considering the above, it is very important to analyze the problem from the point of view of each employee, because when it comes to making specific decisions, it will matter. From this will depend on the success of your company.

Sam: Now I would slightly review my recommendations from that post.

Ben: We listen to you.

Sam: I just wanted to say that employees should have a greater incentive to stay in the company. It still seems to me that if someone is fired, in most cases they are not being treated with justice.

Ben: Sam also stresses that a lot depends on how much money an employee has. If he has enough of them, then he will not be in trouble, because an employee can buy out his shares. This is associated with a certain risk, but nevertheless he has such an opportunity. If he has no money, then there's nothing you can do.



Now, we turn to talking about the man depicted on my T-shirt — Toussaint [ Francois-Dominique Toussaint-Louverture, the leader of the Haitian revolution of the 1790s. ]. He had no equal in applying the above approaches, and I want to give you some very inspiring examples from his biography. Toussaint was born a slave, and in the worst place for slaves - the colony of Santa Domingo, also known as Haiti. In this place were plantations for the cultivation of sugar cane, which flourished the most severe form of slavery in America.

I will give a few numbers. Throughout the entire period of slavery, it stretched for about 400 years - about a million slaves were brought into the United States. By the end of this period, about four million slaves remained there. Two million slaves were transported to the countries of the Caribbean where sugar cane was grown, and by the end of the slave-owning period, there were 700 thousand slaves left. From a purely mathematical point of view, the life of a slave in those places was 10 times more severe. The description of the slave system in the place where Toussaint lived really strikes by the level of cruelty.

It is very important to know this, because changing the situation was very difficult. But Toussaintus had a plan consisting of three components. First, he wanted to end slavery. Secondly, he wanted to seize power in the country and control it. And thirdly, he wanted to raise his country to the level of world standards. He needed not just a country with liberated slaves, but a state that in terms of level could compete with world powers.

An example of good management is Toussaint’s victory over political enemies. First of all he needed to defeat the local slave owners. After he succeeded, he had to deal with the armies of several countries that were very keen to seize power in Haiti, in particular, we are talking about Spain, England and France.

After he defeated them, Toussaint had to decide what to do with the defeated soldiers and the leaders of the opponents. He began to analyze the situation from three different points of view: his soldiers, his enemies, and finally from the point of view of culture, which will be formed as a result. What kind of country does he create? His army was a grain from which the culture of the whole country must "grow".

For the soldiers, the actual question was: “Will we rob?” The soldiers love to loot. The second question: “If our enemies want to kill us, should we kill them?” These questions were basic for the people who fought for Toussaint — the most important people for him. He reasoned like this: "I allow robbery, but prohibit rape." It is very interesting that not only did he ban rape in his army, he also forbade his officers to cheat on their wives. If this happened, he got rid of the officers, because he was very careful about the culture he created.



He asked himself what it would be, this culture, and whether it would become the best in the world. Or will it be below the world level? He thought in this vein. At the same time, his army was known for the fact that its soldiers did not engage in robbery - they were already accustomed to behave honestly. It was one of those things that greatly surprised the vanquished, even white ones. Toussaint could enter their city, and no robbery would follow, even if the victory were his. Again, this was the result of careful attention to the formation of a future culture.

This is a very important and subtle question. Since the culture of Haiti was a culture of slavery and reed plantations, Toussaint considered it very low compared to the culture of the Europeans with whom it came across. He considered slave culture even lower than that of Haiti as a whole. Under these conditions, the person is told: “That’s how you will not do what I tell you? Then I will beat you to death. I'll fill you up with powder and blow you up. ” Given the behavior that develops in such conditions, Toussaint believed that this culture should be replaced. He understood that his country needed development.

After defeating the British, the Spaniards and the French, he made the following decision: to choose the best people from among the defeated enemies and make them generals of his army. Most likely, you did not expect this. It turns out that he is leading the movement for the liberation of slaves, and after defeating his enemies, he takes the latter into his army, despite the fact that quite recently they tried to kill him. Toussaint wanted to conduct an experiment, and also wanted the culture in his army to be at the highest possible level.

The second problem was even more difficult: what to do with slave owners? You lead the movement for the liberation of slaves, seize power over the country - what will you do with slave owners? Again, there are three points of view. From the point of view of slaves, slave owners should be killed, this is indisputable. The country is now yours, you have won - to hell with the slave owners. From the point of view of Toussaint, everything was more complicated, since he wanted Haiti to become an advanced country, and at the same time understood that the cultivation of sugar cane is very important. The whole economy of slavery was based on sugarcane.

On the other hand, he used to be a slave here, and this situation greatly upset him. But he did not know how to manage the sugar cane plantation and did not have the business connections necessary to sell sugar. How to be in this situation? Toussaint turned out to be disciplined enough to admit that slave owners did business in the conditions of an expenditure structure based on the labor of slaves, without which their business does not work. You can not just change the economic system and wait for it to work as before. Slave owners, in turn, also understood that their position gives them a certain influence.

What decision did he make regarding slaveholders? First, it was necessary to end slavery. Secondly, allow slave owners to keep the land for themselves. Third, make them pay their workers and cancel forced labor. To implement this, it was necessary to reduce taxes. In fact, it should impress you all.

We are talking about reducing the tax collection on slave owners after defeating them and abolishing slavery. However, a more important goal for Toussaint was to create a stronger culture. Actions in relation to slave-owners were explained by the need to maintain the economy in the current state. Let's see what results he achieved. First, Toussaint's revolution is the only successful slave revolution in the whole history of mankind. No one has done this before him, and there will not be in the future, since, I hope, there will be no slavery in the world on such a scale. Secondly, slaveholders retained their lands. Third, Toussaint defeated Napoleon.

During his administration of the country, the economy developed rapidly, and culture remained at the global level. Under Toussaint, Haiti received more export earnings than in the United States. That's how successful his revolution was. So effective can be the analysis of the situation from the point of view of all the participants, and even people whom you hate. What is very difficult to do when you are in the role of an executive director, and even more difficult when you lead a revolution.



And in conclusion, I want to say that the most important thing you can learn, and at the same time, the most difficult thing is to be able to see the company through the eyes of your employees, partners, people with whom you don’t even talk, and those who are not near you. .

Now I will answer questions.

Question: If you are forced to dismiss or demotion one of the heads of departments, how should you conduct a conversation with him and how then to explain it to the rest of the staff?

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